Pricing is in the Spotlight Again

The University of Bristol’s Personal Finance Research Centre (PFRC) is long established and well respected, making them a voice listened to in policy making circles. Their report “Driving Up Costs: the Car Insurance Poverty Premium in 2024” provides further evidence of the impact that pricing practices are having on low income families.

There are lots of numbers in the report, but in this article, I will look ahead at what could flow from reports like this. As I said earlier, the report applies further pressure on insurers in four already sensitive areas.

The first such area is clearly the poverty premium. The PFRC research had this to say…

“…a sizeable proportion of this poverty premium is likely to be caused by the increased risk of insuring drivers in these (deprived) areas, i.e. because drivers who live in these areas are more likely to be victims of crime or to be in a collision. There is, however, a sizeable deprivation-related premium that remains somewhat unexplained…”

The big allusion there is to the poverty premium being down to more than just living in a deprived area. So what could be behind that unexplained aspect? Credit scoring? Moral hazard? A grudge provision? Weird ideas about fraud? The PFRC wants to explore this more.

The second ‘already sensitive’ area is of course the ethnicity penalty. The PFRC report concluded…

“…across both deprived and non-deprived areas, quotes were higher in more ethnically diverse places.”

This confirms earlier research by Citizens Advice and BBC Verify, but this time carrying the academic weight of the PFRC. The three pronged approach - consumer group, journalism and academia - is clear.

With the new UK Government’s manifesto referring to “…investigating whether postcode pricing practices are unfairly targeting ethnic minorities and those on lower incomes…”, the sector should clearly be preparing for detailed scrutiny of its pricing practices.

Change the Engagement

The third area is about where that scrutiny will come from. Initially it will come from the Competition and Markets Authority and the Financial Conduct Authority. However, I foresee something more permanent being bolted onto the sector, in the form of a statutory consumer advocate (more here).

That’s not something the sector would be comfortable with, so how might they avoid such an outcome? I believe this would only be possible if they moved their mode of engagement from ‘say a lot, but give out little data’ to ‘say less and give lots of data’. In other words, grasp the nettle and seek to address the issue in one big engagement with politicians and civil society.

Will this happen? I’m not anticipating it.

Let’s look at the fourth area by considering a ‘post third’ scenario. Assume that at the end of the day, lots of data is gathered about the poverty premium and ethnicity penalty, and some form of solution proposed to resolve these problems. Should that solution be one that ensures that the actual risk from the motor policies of low income families is reflecting in the prices being paid?

The PFRC report says this…

“This data should include not just information on quotes/prices paid by different types of consumers in different areas… but should also include data on insurance claims made by consumers. The latter is the missing piece of the puzzle in the analysis undertaken in this report, as it would better allow for an assessment of whether insurance pricing reflects the actual ‘risk’ of insuring consumers in different areas. It should be noted though that even if it is established that pricing does reflect risk, there is a secondary question of the extent to which this practice is ethical and whether it violates the fundamental purpose of insurance to share the burden of risk more evenly across the population.”

Be Careful What You Wish For

What the PFRC is highlighting is something along the lines of ‘be careful what you wish for’. Against the context of a market personalising motor pricing at ever increasing levels, will an ‘actual risk’ approach simply move low income families from the fire into the frying pan?

This is the central point of the pooling / personalisation debate. Is it fair to price people on things they can’t control? (more here). To what degree are low income families bearing unfair impacts of structural poverty with the sector's move away from the solidarity at the heart of pooled pricing? In other words, should stratification be seen as ‘just one of those things’ that come from the digital transformation of the sector, or should it be seen as something more pernicious?

Remember Flood Re and the political reaction that personalised property flood rates brought about. I’ve often said it was a bellwether for the fundamental debate around fairness and insurance.

The question remains however. Once all the data has been exchanged and all the conclusions reached, what are the options for policy makers to delivery the sustainable solutions they will seek? And how do we organise matters so that those options can reasonably be surfaced?  A difficult one, I admit, but one I took the lead on thinking about in this paper back in January 2023 for the Institute and Faculty of Actuaries.

To Sum Up

The PFRC paper does two things. It provides further evidence on key issues, and it then weaves them together. This makes it a powerful report in terms not just of its parts, but also the sum of its parts.

I’m bound to read it that way, some of you may say. You could be right, but then, that’s not really relevant, is it? The PFRC report is aimed firmly at policy makers, and it is their judgements that will count. Will they find its points powerful? It seems likely. Yet their appetite to drive though change will be to some degree affected by the effectiveness of the options available to them.

To get round that problem, I foresee them going down the statutory consumer advocate route. This could end up though feeling a bit like policy makers kicking the issues into touch. The statutory consumer advocate may pull data from the sector and make lots of noise to shame the miscreants. Yet as I said, the question remains. How can this problem be solved in the long run, against the context of an ever digitalising market? That’s the £64k question, and more people need to step up to it.